When you are a freelance contractor you will incur certain costs. Some of these can be claimed before taxes are applied - i.e. they are 'tax deductable'. It is therefore important that as a contractor, your know what counts as a valid expense, so you can keep your tax bill as low as possible.
In this article we explain the expenses you are allowed to claim.
Are expenses rules different between a limited company and an umbrella scheme?
It is important to realise that whether an expense is valid or not is not affected by your decision to operate through your own limited company or an umbrella company. The same tax rules for expense allowability apply to everyone regardless of the payment structure used.
the tax allowability or otherwise of any expenses is not affected by your decision to operate through your own limited company or an umbrella company
The amount of allowable expenses you can claim will depend to a large extent on your IR35 status.
The list of valid expenses you can claim is longer if you are working on contracts which are outside the scope of IR35.
What are valid contractor expenses outside of IR35?
The expenses allowable for a contract not caught by IR35 would be as follows:
The amount of allowable expenses you can claim will depend to a large extent on your IR35 status
- Your gross salary – this would usually be kept low, in order to maximise dividends payable to yourself as shareholder (thereby avoiding employees and employers national insurance contributions).
- Spouses salary (which must be actually paid and not unrealistic, having regard to the duties performed).
- Travel expenses.
- Motor expenses (mileage claims if the car is personally owned).
- Accommodation and subsistence.
- Telephone and business calls only.
- Books, magazines, subscriptions and courses – where related to business and your contract work.
- Bank charges and interest – on your company bank account.
- Pension scheme – where paid by the company to a HMRC approved scheme.
- Business insurances – professional indemnity, business contents and other business related insurances.
- Life Insurance - using a Relevant Life Plan (RLP) - find out more about these.
- VAT on expenses if your company is VAT registered.
- Computer costs.
- Accountancy costs - if using a Limited Company.
What are valid contractor expenses if caught by IR35?
The expenses allowable for a contract which is caught by IR35 would be as follows:
- Your gross salary - this would need to be calculated in accordance with the IR35 regulations (rather than a fixed low monthly salary as above).
- Direct business expenses incurred specifically in respect of the contract work.
- Travel expenses (depending on the circumstances of the contract).
- Administration expenses (limited to 5% of the gross fees receivable).
How dispensation agreements with umbrellas affect expense validity?
Dispensation agreements are granted locally for each umbrella company and vary. They are simply a way of reducing the amount of paperwork required to be completed by the employer (Umbrella company).
They do NOT 'guarantee' that the individual should not have receipts for their valid business expenses.
An individual cannot claim for an un-receipted business expense that they did not genuinely incur and can evidence.
The liability of any underpaid tax resides with the freelancer. If investigated you will need to prove that all your expenses are valid and be able to prove you actually incurred them. So, if an umbrella scheme purports extremely generous expense allowances, no receipts required (ever) and uses this as a main 'feature' then the individual should be very careful.
A dispensation is simply a way of reducing administration and should not be viewed as a way to claim carte blanche on all types of un-receipted expenses. See more about Dispensation Agreements.